So, you’re ready to take the plunge and buy a home? Congratulations! However, you may want to pump the brakes.

Do you have a down payment available, as well? We all know buying a home with cash is nearly impossible, so we depend on home loans to do so. Surprisingly, a home loan usually requires a hefty down payment before banks will approve anything at all!

It is possible to get approved for a home loan with NO down payment, but you will likely receive high interest rates, hefty insurance fees, and large monthly payments.

Let’s talk about how a down payment works, and how you can prepare for your exciting new purchase!

What the Bank Expects

Banks are the ones giving home loans, so it’s a good idea to understand what they are looking for. First of all, they almost always expect a down payment. They feel a little bit uneasy when someone asks for hundreds of thousands of dollars without money to contribute to the investment. That makes sense, right? Would you lend money to someone who can’t prove they can pay you back? Of course not, and the same goes for banks! If they do extend this offer, you will pay in other ways, as we mentioned above.

Banks typically expect you to provide at least 20% of the total purchase price. If you are shopping for a home in the $200,000 range, they will expect a$40,000 down payment. If you are living in California or New York, however, this price can increase dramatically. They could expect a down payment of up to $100,000 (or more)!

Don’t panic just yet! Recent legislation created the FHA program, allowing eligible buyers a decreased 3.5% down payment. This opens the market to those who can’t afford such a high down payment. That$600,000 home you have your eye on suddenly becomes more affordable with just a $21,000 down payment!

Keep in mind, however: the smaller your down payment, the higher your monthly payment. While you may think you scored big time with a fancy house and a small down payment, you may hurt yourself in the long run with pricey mortgage payments. Be careful!

How to Save for a Down Payment

The most obvious answer here is: just save. Start saving the moment that the fancy idea of owning a home pops into your head. A good rule of thumb is saving 30% of each paycheck, so you can quickly rack up cash. With this mentality, and depending on personal expenses, you can save for a down payment within just a couple of years!

If this is impossible for you, try reaching out to friends and family. They may not have $20,000 in the bank, but smaller contributions can make a difference. Plus, they are unlikely to charge you interest or report you to the credit bureau. This is especially helpful as you try to win the bank’s approval.

If you are still short-handed, do a bit of research on government programs that allow home loans without a down payment. Due to the recent roller coaster in the housing industry, many programs have emerged to encourage first time homebuyers to make a purchase.

Be Honest with Yourself

If you really struggle to save money each month for a down payment, consider whether it is the right time to buy a home. This isn’t fun to hear, but you don’t want to find yourself drowning in mortgage payments after moving into your new home.

We have witnessed the other end of that situation as we help people go through bankruptcy. Be realistic, and do what makes the most sense for your individual financial situation.

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